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Tail Risk in a Retail Payments System

Author

Listed:
  • Leonard Sabetti
  • David Jacho-Chávez
  • Robert Petrunia
  • Marcel Voia

    (Carleton University)

Abstract

In this paper, we study a credit risk (collateral) management scheme for the Canadian retail payment system designed to cover the exposure of a defaulting member. We estimate ex ante the size of a collateral pool large enough to cover exposure for a historical worst-case default scenario. The parameters of the distribution of the maxima are estimated using two main statistical approaches based on extreme value models: Block-Maxima for different window lengths (daily, weekly and monthly) and Peak-over-Threshold. Our statistical model implies that the largest daily net debit position across participants exceeds roughly $1.5 billion once a year. Despite relying on extreme-value theory, the out of sample forecasts may still underestimate an actual exposure given the absence of observed data on defaults and financial stress in Canada. Our results are informative for optimal collateral management and system design of pre-funded retail-payment schemes.

Suggested Citation

  • Leonard Sabetti & David Jacho-Chávez & Robert Petrunia & Marcel Voia, 2018. "Tail Risk in a Retail Payments System," Post-Print hal-03573058, HAL.
    • Handle: RePEc:hal:journl:hal-03573058
    DOI: 10.1515/jbnst-2018-0024
    as

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    References listed on IDEAS

    as
    1. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Proceedings 512, Federal Reserve Bank of Chicago.
    2. Danielsson, Jon & Zhou, Chen, 2015. "Why risk is so hard to measure," LSE Research Online Documents on Economics 62002, London School of Economics and Political Science, LSE Library.
    3. Younes Bensalah, 2000. "Steps in Applying Extreme Value Theory to Finance: A Review," Staff Working Papers 00-20, Bank of Canada.
    4. Huynh, Kim P. & Jacho-Chávez, David T. & Petrunia, Robert J. & Voia, Marcel, 2011. "Functional Principal Component Analysis of Density Families With Categorical and Continuous Data on Canadian Entrant Manufacturing Firms," Journal of the American Statistical Association, American Statistical Association, vol. 106(495), pages 858-878.
    5. Michael Tompkins & Ariel Olivares, 2016. "Clearing and Settlement Systems from Around the World: A Qualitative Analysis," Discussion Papers 16-14, Bank of Canada.
    6. Kim Huynh & David Jacho-Chávez & Robert Petrunia & Marcel Voia, 2015. "A nonparametric analysis of firm size, leverage and labour productivity distribution dynamics," Empirical Economics, Springer, vol. 48(1), pages 337-360, February.
    7. Héctor Pérez Saiz & Gabriel Xerri, 2016. "Credit Risk and Collateral Demand in a Retail Payment System," Discussion Papers 16-16, Bank of Canada.
    8. Darryll Hendricks, 1996. "Evaluation of value-at-risk models using historical data," Economic Policy Review, Federal Reserve Bank of New York, vol. 2(Apr), pages 39-69.
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